Taking the credit

27 Apr 2015

4 min read

Not all credit cards are equal. We look at how to choose what's best for you.

Convenience and costs

The first question to ask when choosing a credit card is, do you need one? Credit cards can be a convenient way to pay for things, but there's a cost attached, so consider if having a debit card would be a better option. When you are using money that isn't yours there is usually a charge for it. Do you really want to pay to use someone else's money to pay for things?

According to ASIC, research shows that people spend more when they use a credit card than if they were using cash. Plus there's the temptation of spending money you don't have. So before you apply for a credit card, it's important to consider what you'll be using it for and how you will pay for it. Possibly the worst reason to get a credit card is to use it to pay off other debts. Interest rates and other fees and charges can mean even more debt in the long run. If you believe you can manage your credit wisely, the next step is to get the best deal.

Benefits and charges

All credit cards have different features and benefits that suit different incomes and types of spenders, so it pays to do your research. Here are some of the features you should look for:

Interest free days

Some cards offer interest free days where you're not charged interest for some time, for example 55 days, after a purchase. This is worth having if you pay your credit card off in full each month.

Lower annual fees or lower interest

If you think it's unlikely you will be paying off your credit card in full each month then look for a card with lower interest rates and/or annual fees to keep costs down.

Introductory or honeymoon interest rates

Some cards offer a lower interest rate for an introductory period. Before you sign up, check what the rate reverts to after the honeymoon period as it may, over time, cancel out the benefits if it's higher than other cards.

Credit card balance transfers

This is an offer that allows you to transfer your balance from one credit card to a new one, usually at a lower rate for a period of time, for example 6-12 months. The advantages are that you can pay less interest on the balance and so pay it off faster. Again check the rate it reverts to is still competitive with your original card rate.

Credit card cashback offers

Cashback offers are where cards offer credit back to your account. If the cards carry high interest rates, then this benefit can be quite limited, especially over the long term.

Credit Card Rewards

Many cards offer rewards programs, where for each dollar you spend you may get frequent flyer points for an airline, or deals on goods and services. Rewards programs are not usually a good reason to get a credit card or to spend money on them.

Comparing different cards

It can be confusing trying to weigh the pros and cons of different credit cards. The key factors you need to compare, according to ASIC are:

The minimum repayment

The interest rate that applies to purchases and cash advances

The interest rate that applies to balance transfers and for how long

The promotional interest rate (if any)

The length of the interest-free period (if any)

The annual and late payment fees (if any)

You can also check a Credit card comparison website, just remember that they can be useful but they have limitations. For more information, check out this MoneySmart page.

Finally, it's worth shopping around to find the best credit card for you. Look further than the institution you bank with, and remember credit cards work best when you pay them off every month in full.

Taking the time to consider how you can benefit financially in a low interest rate environment is a great way to strategise for your financial future.

4 mins

This information is current as at 27/04/2015.

BT Financial Group - A Division of Westpac Banking Corporation. This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not constitute financial advice. It has been prepared without taking account of your objectives, financial situation or needs. Because of this, before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation and needs. Information in this blog that has been provided by third parties has not been independently verified and BT Financial Group is not in any way responsible for such information.

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